For the past two months we have wondered how the BEA’s latest growth estimates might impact the Federal Reserve’s stance on monetary policy — and particularly the duration and size of QE. At face value the new headline growth rate of 4.12% qualifies as “healthy economic growth” and places the US among the fastest growing developed countries. In fact, a growth rate above 4% would argue for far more than a modest $10 billion per month taper — if not a return to more historically normal interest rates.
Then why such a modest monetary response?
The Federal Reserve clearly understands that the headline 4.12% is neither real nor sustainable:
— The vast majority of the economy (consumer spending — nearly 70% of GDP) was growing at a paltry 1.35%.
— Over 40% of the headline number came from growing inventories. Conventional wisdom has this component reversing itself in future quarters — reverting to a long term net zero gain or loss. In fact, since 2006 the average annualized real contribution from inventories has been essentially zero (-0.02%). Bloated inventories have a tendency to normalize, and in coming quarters we can expect production cuts to accomplish just that.
— Employment numbers, while technically improving, are still weak by historic “full employment” standards. And it is increasingly obvious that the modest improvement in the unemployment numbers is an artifact of a major deformation of the work force — with fewer people choosing to look for work and more being forced to accept multiple part time jobs.
— Real per capita disposable income is still down -0.85% year-to-date. And if households continue to normalize their savings rates over the next few quarters (just as they have over the past two quarters while attempting to move back towards the savings level “comfort zone” seen prior to the January FICA increase), those increased savings will have to come from reduced spending.
— The aggregate numbers continue to mask an ongoing shift in income distribution: although the average per capita income data has grown some 3.3% since October 2008 (per the BEA), the median household income has shrunk some 7% over that same time span (per Sentier Research). Thus whatever growth the BEA is reporting is not likely to shared by the vast majority of the electorate.
Arguably, the “healthy economic growth” implied in the 4.12% headline growth rate might be considered a tad delusional. And apparently the Federal Reserve knows that only too well.Â
